Fallout from Bali bombing deals blow to shaky recovery

PUBLISHED : Friday, 25 October, 2002, 12:00am
UPDATED : Friday, 25 October, 2002, 12:00am

THE INDONESIAN hotelier looked worried - and with good reason. Room bookings were in free fall after the Bali bombings and prospects for a recovery did not appear bright, he said.

Despite embarking on a hard slog to restore occupancy across the high-end hotel group after September 11 and a spate of anti-American threats in central Java earlier this year, all this effort appeared to be coming to nothing, he added.

'Now I am looking at housing volunteer plastic surgeons in my Bali properties. It is the least that I can do. And I am going to have to start searching cars that come to the hotel here. I don't know why anyone would want to target this place. But you never know these days,' he said.

Many people - local and foreign - share this sentiment in Indonesia as another level of uncertainty has been added to an already chaotic post-Suharto era. Whoever was responsible for the carnage in Kuta, October 12 provided dreadful evidence of a changed world.

While some executives argue that the warnings from Australia, the United States, New Zealand and Britain that people should consider leaving Indonesia are overblown, they do admit the blasts have transformed their understanding of the local risks.

'If things got bad before, you always knew that you could send the family to Bali. They were safe and you were happy,' said one expatriate from the oil industry, a crucial dollar-earner for the government. 'That is not the case anymore.'

It is not yet clear how severe the hit will be from the attacks on Indonesia - or the wider region. But ABN Amro's assessment this week entitled 'Scaling back our expectations' was typical. It noted that while some progress had been made in the aftermath of the regional crisis, Indonesia's economy remained extremely fragile.

ABN Amro's gross domestic product forecast for the nation this year was pruned to 3.5 per cent year on year from 3.8 per cent, while the outlook for next year was cut by 0.6 percentage point to 3.4 per cent.

'The bombing in Bali will place direct near-term downward pressure on the growth and employment of Indonesia's commerce and air-transport sectors, which account for about 3.5 per cent of total GDP and employ about 4 per cent of the total population,' its regional economics team said.

'The negative spillover effects of the recent instability are heightening investor concerns about security . . . There is also increasing evidence of a slowdown in private consumption growth, which we flagged in August as a risk factor.'

The government is scrambling to play down such pessimism, even if that leaves its own forecast out of step with the consensus.

Jakarta's economics tsar, Dorodjatun Kuntjorojakti, this week said he stood by his 5 per cent growth forecast for next year. 'Five per cent is not that dramatic. If we talk about 7 per cent, that's ambitious,' he said.

Whether growth lags next year or hums along at the government's hoped-for rate, it is clear Indonesia's citizens need development to pull them back to their pre-crisis standing.

The most recent macro-economic assessment from the Asian Development Bank (ADB), released a few days after the attacks, does note positive developments on many fronts. But it also warns of the tremendous social challenges.

The ADB said the official target for a fiscal deficit of 2.5 per cent was attainable; inflation and interest rates were trending downwards; bank lending and foreign reserves were up; and foreign debt was down.

But it also noted the crushing weight of poverty. 'Using the US$2 a day measure, the World Bank estimates poverty to be running at 56.4 per cent of the population in 2002, down from a peak of 65.1 per cent in 1999. This means that about 122 million people are living below the poverty line,' it said.

In terms of life expectancy, education and per-capita income, Indonesia ranks 110th out of 173 countries on the United Nations' Human Development Index. Unemployment is put officially at 8.4 million, but could be higher.

Above all, the ADB highlighted the challenge of attracting sufficient investment to buttress growth and improve living standards - a task made all the more difficult by heightened security fears.

'The sustainability of growth hinges on the country's ability to generate a sufficient level of investment to support demand-led growth that would more fully employ the growing labour force,' it said.

Unfortunately, foreign investment approvals in the first half of this year fell 40 per cent to US$2.5 billion, while domestic investment also plunged 70.6 per cent to 11.1 trillion rupiah (about HK$9.38 billion).

The ADB concluded that there were four main obstacles to higher growth: a weak legal system; increasing labour unrest; a new regional autonomy law that had spawned a tangle of new taxes in the provinces; and, last but not least, security issues.

'Unless these concerns are addressed systematically, investment may not pick up, to the detriment of longer-term economic growth and poverty reduction,' it said.